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Economic significance of the predictable movements in futures returns

Abstract:

This paper tests whether the variation in expected futures returns
reflects rational pricing in an efficient market or weak-form market
inefficiency. The issue is investigated by looking at the abnormal
performance of a trading rule based on available information. Once
one allows for time-varying risk and time-varying risk premia, the
investment strategy can be used consistently to generate abnormal
returns in seven out of 26 markets. With relatively few exceptions
therefore, the predictable movements in futures returns reflect weakform
market efficiency. The paper also shows that wrongly assuming
constant expected returns may lead to incorrect inferences regarding
market efficiency.